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The demographic wave that may kill the oil industry

With oil prices still struggling to reach $50 per barrel after two years of unsustainably low prices, energy companies are filing for bankruptcy, hundreds of thousands of workers are being laid off, and governments are struggling to make up for the lost tax revenue.  If this were not bad enough for a global economy whose lifeblood is oil, an obscure population trend is about to add to our woes.

Demographic waves occur in any industry subject to cyclical periods of rapid expansion and contraction.  If an industry expands rapidly, it sucks in additional workers.  When it contracts, the earliest of these workers to be hired tend to be the ones whose jobs are saved.  The last in are the first to be fired.  This results in an uneven spread of age groups within the industry.  The career ladder becomes clogged up by those recruited in the expansion phase, leaving little space for new recruits.  This serves to make the industry unattractive for graduates setting out on their careers with the result that the existing workforce becomes even more entrenched.  Eventually, however, all of those workers who were hired in the expansion phase reach 55-60 years and retire all at once.  Suddenly the industry is faced with a massive loss of experience, knowledge and skills that must be rebuilt from scratch.

This is essentially what has happened in the oil industry according to Alex Nussbaum and David Wethe at Bloomberg:

“U.S. explorers are grappling with the demographic hangover of the last great industry downturn in the 1980s, when scores of drillers went out of business. That rout drove a generation away from the business, leaving a shortage of workers in their late 30s to 50s today just as companies try to replace the Baby Boomers who make up much of senior management.

“What the industry calls the Great Crew Change — the looming retirement of thousands of older workers — has companies trying to plug the gap by training younger employees, recruiting outside the industry and enticing veterans to hang on longer. It’s also forced drillers into a delicate balancing act amid the current downturn, as they lay off thousands but try to hold on to hard-to-replace scientists and engineers.”

When the global economy has burned its way through the current oversupply of oil – most likely sometime during 2017 – prices will be rising dramatically once more.  However, in the wake of the disinvestment and cancelled exploration that has taken place over the last two years, a global shortage of specialist engineers and technicians can only add to the projected shortages.

A year from now, far from worrying about low oil prices, we will likely be wondering how the global economy is going to operate with oil at $200 per barrel.

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